[If they auto-enroll everyone in their newly generous
income-driven repayment plan, it will significantly take the sting out
of resuming payments. Joe Biden’s plan is the culmination of years
of activist work.]
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ONE WAY OUT OF THE WHITE HOUSE POLITICAL BOX ON STUDENT DEBT  
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David Dayen
August 25, 2022
The American Prospect
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_ If they auto-enroll everyone in their newly generous income-driven
repayment plan, it will significantly take the sting out of resuming
payments. Joe Biden’s plan is the culmination of years of activist
work. _

President Biden speaks about student loan debt forgiveness in the
Roosevelt Room of the White House, August 24, 2022, in Washington.
Education Secretary Miguel Cardona listens at right., Photo credit:
Evan Vucci/AP Photo // The American Prospect

 

Joe Biden’s plan
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cancel some student debt for everyone and extinguish the full balance
for nearly half of all federal borrowers is the culmination of years
of activist work. When we published our explainer
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the president could cancel federally held student debt in 2019, many
policy wonks tried to throw up reasons why it couldn’t happen. They
lost the battle inside the White House, thankfully.

But the White House still has a political problem. Federal student
debt payments have been suspended since the beginning of the pandemic,
and in its announcement the administration said that pause would be
extended one final time until the end of the year. That means that in
January 2023, 23 million borrowers will start having to make a payment
that has been on hold since March 2020.

Relatedly, to make those payments and avoid default or wage
garnishment, they’re going to have to reduce their discretionary
spending elsewhere. That means that while the government is getting
student loan payments again, restaurants and department stores and
other goods and services will probably see slower sales. For an
economy already moving into slow growth or even a recession, thanks to
the diligent work of the Federal Reserve
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a serious economic problem that will also resonate politically.

Whenever you restarted student loan payments, this problem was going
to emerge. It was unavoidable. What is the way for the Biden
administration to find a path out of this cul-de-sac and manage the
transition with the least amount of harm? How can it give the
remaining student borrowers a way to feel like they’re being treated
fairly? How can it minimize the impact on the economy? How can it
solve the future of education finance?

One plausible answer lies in one of the other announcements the
administration made on Wednesday.

The Biden administration has significantly improved the income-driven
repayment (IDR) program, which bases monthly payments on a
borrower’s earnings. What was a decent system before is now a real
model for ensuring that college students give back to the loan program
what they got out of it. The next step for the White House is to
figure out how to automatically enroll every student borrower in this
payment program.

Previously, the IDR system limited monthly payments to 10 percent of a
borrower’s income for 20 years. Now, the limit will be 5 percent,
cutting the payment in half, though only for undergraduate debt. Plus,
there are exemptions for “nondiscretionary” income: Under the new
rules, if a borrower makes up to 225 percent of the federal poverty
level—currently around $30,000 per year, or $15 per hour for a
full-time job—they won’t pay anything at all, and these provisions
apply to graduate school debt too.

The improved income-driven repayment program is obviously a huge
advance and has the makings of a logical system for higher-education
finance.

As long as borrowers make this payment, their balance will not go up
because of accrued interest. And after 20 years in this program, the
remaining amount due will be forgiven. If the initial loan balance was
$12,000 or less, that time frame goes down to ten years, and the White
House believes this will mean that just about all community college
borrowers will be debt-free in ten years. It is estimated that these
changes would save $1,400 a year for a single borrower making $38,000
annually, and $2,800 a year for a married borrower with a salary of
$77,000.

This is obviously a huge advance and has the makings of a logical
system for higher-education finance. For those who take out loans and
enroll in IDR, the burden would be substantially reduced and in line
with the wage premium that college provides them. If they have a
successful career, they will pay more; if college didn’t work out
for them, they will pay less, or nothing. It would all be in line with
income, and time-limited to no more than 20 years, so stories
of senior citizens still paying off student loans
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mostly not exist.

The main problem here is take-up. According to the Education
Department’s year-end report, as of June 2021 only 32 percent
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student loan borrowers are enrolled in IDR. Moreover, as Matt
Bruenig points out
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individuals with higher loan balances use IDR in higher numbers than
those with lower balances. This makes sense, because it’s a better
deal if your balance is higher. But the exemption in particular for
nondiscretionary income now makes IDR a good deal for everyone.

The next step is to auto-enroll everyone in IDR. If this were the only
path for borrowers to pay back federal loans, it would make the cost
of those loans somewhat irrelevant. For most people who borrow more
than $12,000, they would make this 5 or 10 percent payment relative to
their annual income for 20 years and be done.

The only issue would be informing the government of changes to their
income status, but there’s help on the way there. The FUTURE Act
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passed Congress in 2019, will allow borrowers next year to give the
approval for the Education Department to work with the IRS to pull
their income information automatically. No recertification process
would be needed, meaning the 5 percent threshold would be kept up with
a person’s income. This is a small but critical change; previously,
borrowers had to recertify their income every year, and it likely led
to a lot of people dropping out of the program.

This policy could help get everyone auto-enrolled into IDR. If on the
application form for taking out a student loan, the borrower could
check a box allowing for the IRS and the Education Department to talk
to one another, then IDR enrollment could be handled on the back end.

If people restarting payments next January knew that they wouldn’t
have to pay more than 5 percent of their income and could get it
forgiven in a certain time period, they would at least get that peace
of mind in exchange for having to pay again. It would blunt some of
the political downsides of resuming repayments. To the extent that
those monthly payments are lower for people who get enrolled in IDR,
it would reduce the economic impact of restarting payments as well.

The downside of this is similar to the government subsidization of
higher ed more generally. If student loan payments aren’t as much of
a burden, then colleges and universities could feel free to raise the
cost as much as they want. Essentially, this would become a transfer
from the government treasury to higher education administrators.

That’s where the White House and Congress can get involved. As my
colleague Ryan Cooper explained
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future rulemaking could require institutions to lower the cost of
college as a condition for obtaining student loans. In fact, Congress
would have some incentive to get those costs down, if the government
is even more on the hook for them.

The Biden administration could add to that pressure, in fact. It could
say that it will continue to cancel student debt as long as Congress
doesn’t take control of the runaway education finance system. This
is a way that executive action can spur action at the legislative
level; Congress doesn’t want to get cut out of the deal.

The improved IDR system offers an opportunity to rationalize
higher-education finance. It just needs to be made available to
everyone.

_[DAVID DAYEN is the Prospect’s executive editor. His work has
appeared in The Intercept, The New Republic, HuffPost, The Washington
Post, the Los Angeles Times, and more. His most recent book is
‘Monopolized: Life in the Age of Corporate Power
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_Read the original article at Prospect.org
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Used with the permission. © The American Prospect
[[link removed]], Prospect.org [[link removed]], 2022.
All rights reserved. 
 
Support the American Prospect [[link removed]].
Click here [[link removed]] to support the Prospect's
brand of independent impact journalism_
 

* Student Debt
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* students
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* youth
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* poverty
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* Education
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* inflation
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* Biden Administration
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* 2022 Elections
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* Poverty and Wealth
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* Economic Policy
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* Joe Biden
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